February 15, 1972 FOMC Record of Policy Actions

FOMC minutes

The information reviewed at this meeting indicates that real output of goods and services increased more rapidly in the fourth quarter than it had in the third quarter, but the unemployment rate remained high. For the current quarter, growth is projected at a rate close to that of the fourth quarter. Prices increased sharply in December, in part reflecting termination of the 90 day freeze. Wage rates also rose substantially in De cember when some increases that had been deferred under the freeze were allowed to go into effect, but the rise slowed in January. The narrowly defined money stock, which had not grown on balance from August to November, rose somewhat in December and January. Inflows of time and savings funds at bank and nonbank thrift institutions increased sharply in January, and both the broadly defined money stock and the bank credit proxy expanded rapidly. Some short-term interest rates have declined further in recent weeks while yields on long-term securities generally have increased from the lows reached around mid-January. Exchange rates for most major foreign currencies against the dollar have appreciated to levels near or above their new central values. Since the Smithsonian meeting, capital reflows to the United States have somewhat exceeded the underlying U.S. balance of payments deficit. In light of the foregoing develop ments, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to sustainable real economic growth and increased employment, abatement of inflationary pressures, and attainment of reasonable equilibrium in the country's balance of payments. To implement this policy, while taking account of international developments, the Committee seeks to achieve bank reserve and money market conditions that will support moderate growth in monetary aggre gates over the months ahead. Votes for this action: Messrs. Burns, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sheehan. Vote against this action: Mr. Hayes.

Mr. Hayes dissented from this action for essentially the same reasons he had dissented from the directive adopted at the previous meeting. First, he did not favor placing as much emphasis as contemplated on reserves as an operating target; he preferred to place main emphasis on money market conditions for that purpose. Second, he thought the policy agreed upon could result in an easing of money market conditions to a degree that in his judgment would entail substantial risks both domestically and internationally. 2. Continuing authority directive. On January 26, 1972, a majority of Committee members had voted to suspend, until close of business on February 15, 1972, the lower limit (set forth in paragraph 1(c) of the continuing authority directive with respect to domestic open market opera rates on repurchase agreements arranged by tions) on interest the Federal Reserve Bank of New York with nonbank dealers. The provision in question, which also had been suspended for the period from December 23, 1971, through January 11, 1972, specified that such repurchase agreements were to be made "at rates not less than (1) the discount rate of the Federal Reserve Bank of New York at the time such agreement is entered into, or (2) the average issuing rate on the most recent issue of 3-month Treasury bills, whichever is the lower." Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, and Sheehan. Vote against this action: Mr. Robertson.

This action was taken on recommendation of the System Account Manager, to provide against the contingency that under existing rate limitations it might not prove feasible to enter into repurchase agreements during coming weeks in the volume likely to be found desirable to meet the Committee's objectives for member bank reserves. It was understood that rates below 3-1/4 per cent would not be used without prior notification to the Committee. The action of January 26 was ratified at today's meeting. Mr. Robertson dissented from the ratification as well as from the original action for reasons similar to those underlying his dissent from the similar action taken in December. He preferred to have needed reserves injected into the banking system by means of outright purchases of Treasury securities in the open market rather than through repurchase agreements with Government securities dealers. In his judgment such agreements actually constituted subsidized loans to dealers, and he saw no justifica tion for increasing the subsidy by making them at lower and lower rates of interest.

3. Revision of guideline for operations in agency issues. On August 24, 1971, when the Committee had first authorized issued by Federal agencies, it had outright operations in securities guidelines for the conduct of such operations approved certain initial that they would be subject to review and revi with the understanding gained. At this meeting the Committee revised sion as experience was No. 5, under which purchases were limited to issues out guideline standing in amounts of $300 million or over in cases where the of 5 years or less at the time of purchase, obligations have a maturity amounts of $200 million or over in cases and to issues outstanding in have a maturity of more than 5 years at the time where the securities of purchase. As revised, the guideline specified that the maturity of the obligation should be taken as of the time of issuance, rather than as of the time of purchase, in determining whether it was eligi ble for purchase. Votes for this action: Messrs. Burns, Hayes, Brimmer, Clay, Daane, Kimbrel, Maisel, Mayo, Mitchell, Morris, Robertson, and Sheehan. Votes against this action: None. This action was taken on recommendation of the System Account Manager, on the grounds that from a practical standpoint it was undesirable for an obligation initially eligible for purchase and perhaps already held in the System Account to become ineligible merely because its maturity had shortened with the passage of time.